John Bajkowski is the president of the American Association of Individual Investors (AAII), a company dedicated to teaching individual investors to become more effective managers of their assets. John has been with AAII for 30 years and serves on the Dividend Investing and Stock Superstars advisory committees.

For this interview, we include a question suggested by our previous interviewee, Gail MarksJarvis: If you could get away scot-free with punching somebody in the face without either jail time or a broken hand, who are you hitting and why?

Matt: What is your favorite investment book?

John: If I had to pick one, it would be “Contrarian Investment Strategies: The Next Generation” (1998) by David Dreman [originally published in 1980 under the title “Contrarian Investment Strategy”]. David Dreman considers himself a contrarian investor, and he is also a pioneer in the area of behavioral finance. What I really enjoy about his book is that not only does it provide a quantitative framework—an understanding of how to make investment decisions, how to put together a portfolio of stocks and how to decide when to sell a stock—but it also delves deeply into the emotional element of decision-making, into the whole notion of how we make decisions, what drives us, what fallacies exist. It [was one of the first books to] really go away from just looking at us as being sort of the emotionless perfect individuals to people who have fallacies, who are overconfident in our decisions. We don’t necessarily act rationally, and those are all things that hurt us in terms of an investment process.

Matt: Are there other books, maybe not necessarily purely finance-based, that you enjoyed reading on that same topic?

John: “Thinking, Fast and Slow” by Daniel Kahneman was good; I thought there was a lot to be learned from that.

Tom Howard, who was a professor at the University of Denver and used to do seminars for us in the area of stock analysis, came out with a book [“Behavioral Portfolio Management: How Successful Investors Master their Emotions and Build Superior Portfolios”] that also tied in with behavioral finance and portfolio decision-making. The point that Tom makes really well in his book is that so much of the market is focused on short-term volatility. But if we’re individual investors and we have a long-term perspective, we could take advantage of that market focus on short-term volatility to buy mispriced stocks that are going to help us achieve long-term gains.

Matt: So, you’re a fan of the David Dreman contrarian methodology?

John: Yeah, I am. It’s tough because I help to develop a David Dreman stock screen we have used at AAII, which required that I study his methodology and create an article for the AAII Journal. As Dreman came out with revisions to his book, and he’s revised his book a couple of times, I went through and created additional screens that try to capture the new ideas presented by Dreman.

I think the first Dreman screen we had focused more on the quantitative elements. And then when I read the next edition of his book, “Contrarian Investment Strategies: The Psychological Edge” (2011), he had a lot of information in there on the use of earnings estimate revisions, earnings surprises, and the notion that the earnings surprise affects deep-value stocks differently than it affects growth stocks and how you could use positive earnings surprises effectively with value stocks. And so we developed a screen that helped take advantage of deep-value stocks that have an earnings surprise element to them.

These screens are, in effect, buying those securities after that first big change, that first big stock price movement up or down. And it points to the fact that the markets do take a while to digest information. A significant earnings revision points to the analyst community and the market trying to reassess the prospects of a company and perhaps changing their viewpoint. Dreman points out that if an out-of-favor stock has a positive revision, it really changes people’s assessment of the stock’s value. When a growth stock (an in-favor stock) has a positive revision, it’s just confirming what investors already assumed. Everyone expects this growth stock to have a positive surprise. For a growth stock, the big news is a negative surprise, because all of a sudden it’s like, “wait a second, you were growing so quickly, now you’re not growing anymore. Why not?”

Matt: Oddly, I think one of the Estimate Revisions Downward screens is actually one of the better-performing of the AAII stock screens.

John: This year it is, but it seems to vary over time. I think if you were to track the long-term performance, you’d find a divergence. There are points in time where for some reason the downward-revision screen has a year where the stocks that pass it still do well, and I’m not sure if that’s a point of economic uncertainty or economic change. But it’d be interesting to look at those points in time and see if there’s anything to be determined from that. It doesn’t happen often, but there are some years when the Revisions Down screens do well, and I think this is one of those years. Overall, however, the screens based on upward revisions have far surpassed the screens with stocks that have experienced significant downward revisions.

Matt: When you’re tracking companies or stock screens, do you have a favorite program, application or website that you use?

John: Well, I’m a bit of a dinosaur here, because over the years I’ve tried many different kinds of applications and programs. I’ve tried things like Quicken and even programs that don’t exist anymore. A long time ago I settled on a program called Captool.

The company still exists, and they make a portfolio management tool that allows you to input your portfolio and keep track of the evaluations of your portfolio over time. It also will calculate all your various schedules in terms of realized gains, losses, things like that. But the wonderful thing about this program was that you could, between any points in time, calculate the true rate of return for your portfolio and the rate of return of all securities in your portfolio. So you could say, well, how did I do this year versus that year, and how did the different securities do? You were able to define different segments of your portfolio.

The thing is that many years ago this vendor primarily stopped serving the individual investor marketplace. It still makes the program, but primarily gears it toward the professional money manager who’s creating reports for their clients. They still make a version of their program for the individual investor, called the Personal Wealth Manager. But again, it’s geared toward a person who has a larger portfolio. You have to pay an annual fee to use the program. I think the first-year fee is $1,200 per year, and then thereafter you’re paying a $600-per-year renewal fee.

It wouldn’t be practical unless you have a larger portfolio. I’m still using the old version, and again they’re not supporting the old version anymore.

In preparation for this interview, I was looking at my first investment and my least-successful investment. I was actually able to use this program to run a report to look at all my holdings and the rates of return over time. It took a while to sort through all that information.

Matt: What was your first investment?

John: I was looking to have a little bit of diversification right off the bat. My first investment was in a mutual fund, and it happened to be the Acorn mutual fund [now Columbia Acorn Z (ACRNX)]. At the time it was run by Ralph Wanger, who himself is a bit of a contrarian, a prominent Chicago investor. I heard him speak at one of our conferences, and I have since then actually read one of his books, “A Zebra in Lion Country,” where he helps to define the whole nature of being a contrarian investor and trying to stand out from the crowd a little bit.

So my first investment was in this Acorn fund. I had some money set aside. I thought that was an interesting way to get started in the market while I built up my investment funds that I could then use to diversify and buy into individual stocks.

Matt: How do you allocate your assets or diversify?

John: Well, I like to think myself as sort of a contrarian investor, and the majority of my funds are actually invested in mutual funds, but that has changed over time. I’m using exchange-traded funds (ETFs) more now, but the majority of my funds are allocated into mutual funds and/or ETFs. I invest some in individual stocks, stocks that operate in industries I understand or micro-cap stocks. I’ve got some of my retirement funds invested in the shadow stocks, for example. I use mutual funds to give me the broad picture, and then I invest in individual stocks that are in an area with a competitive advantage for me.

Matt: As far as tracking daily news and economic information, what kind of websites or apps do you use? Do you use mobile or desktop? What’s most accessible for you?

John: I try to keep abreast of the general news, and I try to keep abreast of specific stocks that I hold. And it’s a challenge, because things have changed over time. For general news, I typically read The Wall Street Journal. I also use a service called Feedly, which is a RSS aggregator. RSS feeds aren’t as popular as they used to be. RSS stands for “real simple syndication,” and as websites publish information, they can tag something as being new and then you could use an RSS aggregator to keep track of all new news items in one location. Feedly allows you to segment the sources into different sections.

Google used to do this, but they got out of the business for the most part. Feedly is one service that I use where I subscribe to news information from CNN and The Wall Street Journal, tech blogs, news blogs. I can go through and scan all the headlines in Feedly, and I can mark them as being read or I save them for later. I can read that RSS feed on my iPad or I can go to my desktop. And it coordinates everything together in one spot.

This way I don’t have to duplicate my readings. The other site that I’m using more and more nowadays is Seeking Alpha, and their iPad app. I set up portfolios in Seeking Alpha and I’m able to keep track of news, analyst updates and transcripts of company events by portfolio. So if I have any stocks that are of interest, I can check that on a regular basis. And they do a nice integration between the web and their iPad app.

Matt: So you like to use software that’s most accessible to you wherever you are at the moment?

John: I try to, and the challenge is not being overloaded with information. We’re inundated more and more with news that’s screaming at us. When I first got started in this business, if I wanted to look up information online there were very few sources. A lot of them were professional and required the use of a modem, specialized software or very expensive subscriptions. So if I wanted to look up news on the Dow Jones newswire, I had to pay quite a bit to do that, or I’d have to log in to CompuServe to get information on stocks.

Matt: What was the process of stock screening like before readily available computer programs came along?

John: The whole notion of stock screens, I think, is that they are wonderful ways to get ideas of stocks that follow a particular pattern or have desired characteristics. When I got started doing this, one of the things Value Line did was provide these lists of predefined stock screens in a print publication. So every week you’d get some ideas that came with their updates as you got updates in the mail.

Benjamin Graham is considered the father of modern financial management. He wrote “Security Analysis” (1934), which is geared toward the professional marketplace, and he also wrote “The Intelligent Investor” (1949), which is geared toward the consumer, the individual investor. He would update “The Intelligent Investor” periodically as the market and his thinking evolved. One of the things he had in there, especially in the last edition of the book that was published before he passed away, went through using an S&P Stock Guide, which is a print publication that had basic financial data on about 4,000 stocks. He gave people a way to quickly go through this paper document and perform a manual screen, in effect to find a list of stocks that were suitable for the defensive investor or for the person who wanted to spend more time and become more engrossed in the management, which he called the “enterprising investor.”

We actually used those filters to develop screens for our website and for Stock Investor Pro. But at the time he was telling you how to take a paper monthly guide that came to you and go through it and use a manual filter to come up with a list of stock ideas. And nowadays, you just blink and you get those ideas right then and there.

Matt: Yeah, clearly things have changed very much, especially with computers and how that’s influenced investing. You were the third editor of Computerized Investing, and when you first started working at AAII you began working with this publication. Has the term “computerized investing” changed from then to now?

John: It’s changed quite a bit. When I first started here, we had a computer lab at the time, and the computer lab consisted of an array of personal computers that individual investors could use. We had the Macintosh and we had an IBM PC and we had the first Compaq in there, but we also had a Commodore 64, which people were using for investment analysis. We had an Apple II, which ran one of the first stock-screening software programs that were available for individuals that S&P put out, Stock Pack II. We had a K-Pro, which ran CPM. We even had a Tandy TRS-80 (nicknamed trash 80), which again was a computer that individual investors would buy and use to help assist them in the process. The big difference back then was that these were largely closed-off systems, and you’d write your own programs and you’d buy programs. We would publish BASIC code in CI to perform investment analysis.

People would even sell programs that came in Ziploc bags and load on your computer. And you’d enter all your data by hand and you’d run your analysis, and nothing was integrated; information didn’t flow easily.

The programs assisted you in the decision-making process, but the information didn’t flow easily. You then had a wave of spreadsheets—Lotus 1-2-3 was popular back when I started—and advanced models to help assist in the decision-making process. The notion was to come up with some sort of framework to make a decision. When people talked about computers, they talked about personal computers, and nowadays the whole notion of a computer or a device that’s not hooked up to a constant source of information is just alien. I mean information is so plentiful now that we’ve gone from a situation where we’re seeking out information to a situation where we’re seeking out how to filter that information in a meaningful way to help us make meaningful decisions and not get overwhelmed by information.

A computer now: Is it a phone, is it a laptop, is it a tablet? Well it’s all of that, but no matter what, the types of decisions we’re making, the types of analysis we’re doing are still the same. Many of the principles that were valid 50 years ago are still valid today, and it’s just as important today as it was then to have a sound framework to make a decision, a framework to analyze the information coming in so that you don’t become a slave to the information, you aren’t overcome by data. You can actually tame information and it becomes a tool. I think the trick is learning how to have that information be a useful tool as opposed to a tool that overwhelms you and then you get sort of frozen and paralyzed, don’t know what to do.

Matt: So your first larger projects with Computerized Investing involved coming up with ways to filter through some of that information as an individual investor?

John: It was. I also did a lot with spreadsheet analysis.

I focused on how to help create spreadsheets that you could use to model decision-making, whether how much a bond value will change for a given interest rate change or how to value a stock. One of the first spreadsheets I developed for CI was a spreadsheet on DuPont analysis, which is a ratio analysis tool. I was trying to help members build spreadsheets to make decisions—rational decisions—and also help them to come up with the portfolio allocations. I even did a budget analysis spreadsheet. I remember doing a value averaging spreadsheet. Even back then a lot of people were using, and still use, spreadsheets to keep track of portfolio holdings and securities.

Matt: You talked earlier about your first investment. If you had a failed investment, what would you say your worst investment was?

John: One failed investment I had was Tellabs, a telecommunications company. They made systems that the telephone companies used to manage traffic data on their networks. They were early pioneers in making that data flow better, working with fiber optics and what not. This is back in the 1990s, and the sales were booming. Information was flowing. Telecommunications companies needed more bandwidth, and they were buying this equipment to increase the capacity.

Well what happened first was is that, all of a sudden, they ran into a merger problem that kind of fell apart. They tried merging with another company, and initially it was supposed to be a win-win. They were going to be able to take this other company’s product, I think it was Ciena Corp. (CIEN). This larger company was going to be one of the biggest telecommunication mergers, tech company mergers, out there. This is in the late 1990s; this is the information technology boom. And then all of a sudden the merger fell apart, and turns out that companies like AT&T (T) were going not to buy Ciena’s equipment; they were backing out of their tests with Ciena. The merger quickly fell apart, and this path for growth started to sort of fall apart.

In general, this product became more and more of a commodity. And companies, rather than doing specialized equipment like Tellabs’ equipment, you started to see more generic network equipment from companies like Cisco Systems (CSCO). And my mistake was not immediately selling Tellabs. I probably went from a little bit of a loss to a major loss, because over time the sales trend continued to go down and down and down. The company still made good equipment and everything, but I failed to realize that I bought this company because of its growth potential, and the growth went away. Rather than recognize that the reason I bought the company was no longer valid, I was now holding it because it was a value play and it made no sense for me to do so. I ended up selling it years later; rather than just simply admit a mistake right away, I held onto it.

Matt: Are there investments you’ve made that have been based on a personal decision or desire to be invested in something, more of a “fun” investment?

John: Yeah, Pixar, for example. In some cases, you read about these companies and you kind of enjoy being involved with these firms. Pixar was then acquired by Disney (DIS), which is also fun to follow with their theme parks, entertainment business and ESPN holdings. I even picked up a share of Berkshire Hathaway (BRK.B), the less-expensive version. But you automatically get the annual reports and what not, and you get to read about these things and become more knowledgeable. Sometimes you take some personal experience and try to have fun with it.

Matt: What is the best advice you would give out to someone, say a millennial, getting started with investing looking for a long-term solution?

John: Well the first bit of advice I would give is to just get started, and put some money into an index fund. They should get started by investing in the market. It doesn’t take a lot of money to get started, and you let that money grow. And as you build up your investment portfolio and you develop the interest and tools and abilities to start selecting individual securities, you can then take some of that money aside and then start investing in securities that are interesting to you. But I would recommend having a diversified base and then building up onto that with some additional investments. And have a plan; have some sort of strategy in place.

Matt: What kind of resources would you recommend an investor use to develop a strategy?

John: As you know I work for the American Association of Individual Investors…and the stock screens themselves are a wonderful resource on our website—you have 50 different screens there of a wide array of strategies. And each screen has an explanation of the philosophy behind it. You could use that as a starting point to get going. The Model Shadow Stock Portfolio is another option. And if you’re getting started, whether you’re a millennial or someone older, the booklet “A Lifetime Investment Strategy” by our chairman Jim Cloonan is a short read and it’s available to all association members. It gives you a good overview of the marketplace. It gives you an overview of how to get started, and it provides a framework in which to build a portfolio and examine the risk/reward profile of various asset classes. That would probably be the first place to get started, and then find some sort of philosophy that fits with your style, that fits with the amount of time you have to commit. If you’re going to be managing a stock portfolio, you have to be cognizant that it’s going to take some time to manage.

You could more easily buy a mutual fund and only check on it quarterly or annually than you can an individual stock where you have to keep abreast of the news and company developments. So you have to be realistic about your interests and time commitment if you’re going manage your own stock portfolio. Whereas, if you’re managing just an overall investment portfolio, you can start off with mutual funds and have a diversified portfolio that’s going to meet your long-term needs.

Matt: In the wide range of investment-related topics, what’s something that bothers you? What’s a pet peeve you have with the investment community or process?

John: If I have a pet peeve, it’s the whole notion of people just throwing out stock ideas, tips as if they are universally good or bad, without a framework. Are you investing, or are you trading? Investing is a long-term commitment, whereas trading is more akin to gambling, and it’s probably not within the competitive advantage of most individuals. If you turn on the TV, look at websites, or whatever else, you’re going to have these pundits who are just tossing out ideas and saying, “Buy this, sell this, buy this, sell this.”

Maybe they’re good ideas, but without a framework to make a decision, I can’t tell you if it’s good for you or if it’s good for me. And then they come back and they talk about their track record. Well, there’s just no consistency to that. There’s no framework for that. There’s no way to analyze what they’re doing and decide whether what they’re doing is a good idea or a bad idea for you and me. I mean, a good long-term investment may be a bad short-term trade.

But without the context in which to say this is an investment, not a trading idea, I think too much of what we see online is a lot of noise and just short-term trading ideas as opposed to any kind of true long-term investments. And I think trying to trade is probably a loser’s game for most individual investors. To think that you could act more quickly or more nimbly than super-sophisticated investors that are backed by the quickest computers and quickest minds on Wall Street armed with much deeper information is probably not a fair and accurate assessment.

Matt: My last question comes from our previous interviewee Gail MarksJarvis (and Chuck Jaffe before her), if you could get away scot-free with punching someone in the face with neither jail time nor a broken hand, who would you hit, and why?

John: That’s a really tough question. I don’t know. The first person who comes to mind, and this may be too obvious, is Bernie Madoff. He put himself in a position of trust managing other people’s money and what not, and in the case of NASDAQ again a position of trust, and he was swindling them and using them to support a lifestyle. That to me is just terrible. It also destroys people’s trust in the system: The whole investment system gets painted as being fixed.

Matt: If you were to ask the next interviewee their final question, what would you ask them?

John: I think I’m always curious, if I’m talking to someone who’s a professional, about the whole notion of what do they do outside of their work life. For me it’s something as simple as “what book are you reading now?” I read an article recently that said Donald Trump doesn’t really read much, so I’m not sure what book he’s reading, if any, and some people might not read at all. But if they do, I would ask, “what leisure book, if any, are you currently reading?”